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Nov 11, 2015 @ 08:11 by Alexander Voss

Insights on China’s Digital Transformation from our INSIDE CHINA SUMMIT

With more and more tech innovations coming from Asia, business experts worldwide expect China - the “Silicon Dragon” - to become the new global digital hotspot.

Reason enough for our summit to bring together China's digital disrupters and a selected group of visionary European executive leaders from different sectors to get an inside view on the booming Chinese digital economy.

Our INSIDE CHINA SUMMIT took place from October 26th to October 29th in Shanghai and Hangzhou. We received invaluable insights into China’s fascinating digital ecosystem from Chinese and German experts, organized exclusive visits to the e-commerce giant Alibaba Group, the German Consulate, visited emerging startups in Hangzhou’s startup incubation facility ‘Dreamtown’ and connected with over 100 leading Chinese e-commerce companies at the ‘Sino-German E-Commerce Leadership Summit’. 4 days, more than 20 speakers and so many inspiring ideas and discussions. It is absolutely impossible to summarize this event but provide you with some insights into key discussions.

Digital Transformation in China is revolutionary, not evolutionary

The Chinese Digital Consumer
The Chinese Digital Consumer

The Chinese market has been developing exponentially – not linear - over the last 10 to 15 years. Like no other country in the world, China managed the coexistence between ‘the old and the new’ – 5000-year-old tradition and digital modernity. What marks this development as considerably different to most established markets is that it is revolutionary, not evolutionary. Chinese Internet users access the Internet via mobile devices, partly having leapfrogged technologies such as land lines and desktop computing.

“China has become truly mobile first.” (Vincent Qui, CEO Baozun at the INSIDECHINASUMMIT)

The reason for this development is quite obvious. Chinese took advantage of the absence of established communication and trading patterns. This is why China jumped directly into the ‘Mobile Age’ with over 500m smartphone users. And it is not just the Internet industry that is undergoing this type of change. We see this change happening rapidly across a country of remarkable size and complexity with a population of 1.3bn people.

Also, the adoption of digital services by the Chinese citizens is remarkable as well. During our visit to the elite University Fudan, one of the PhD students told us that she had not been to a supermarket in three years for non-perishable goods - as she was able to order everything online.

Fudan University in China, visited during our INSIDE CHINA SUMMIT
Fudan University in China, visited during our INSIDE CHINA SUMMIT

China’s digital ecosystem is shaped by CAT

“All you have to know about China’s digital ecosystem is CAT – Communist Party, Alibaba and Tencent” (Michael Kuan, Founder & Chairman Kuan Capital Holdings at the INSIDECHINASUMMIT)

Today, the government controls about 40% of Chinese economy. That makes very clear that the communist party has significantly been involved in shaping the digital transformation and ecosystem in China. With their ambitious strategy ‘Made in China 2025’, the government plans to further combine Internet and advanced technology for intelligent manufacturing. The initiative draws inspiration from Germany's ‘Industry 4.0’ plan.

Alibaba Group Headquarters in Hangzhou
Alibaba Group Headquarters in Hangzhou

Companies like Alibaba and Tencent managed to evolve into China’s online giants ranking at the top of the booming online market. Today, these two belong to the Top 5 of the world’s leading Internet enterprises (measured by revenue). A common feature of their success is that they build an entire coherent ecosystem of capabilities and services just like Amazon did e.g. in the US and Europe.

During this year’s singles day (shopping event similar to Black Friday in the U.S.), Alibaba proved again what they are capable of: about US$14.3bn sales in gross merchandise volume (GMV) and about 300m shipped packages.

One of the biggest success stories of Tencent is the messaging platform WeChat. With over 600m active users per month, WeChat has evolved to being almost as large as WhatsApp. However, it offers much more than WhatsApp as it is more like an “ecosystem of service solutions” (James May, Chief Growth Officer Carat China at the INSIDECHINASUMMIT). Users can manage most of their daily lives using WeChat - e.g. family, work, dating, money transactions, shopping, telephone calls, and messaging of course.

Entrepreneurs of tomorrow in Dream Town

Dream Town is a state funded start-up incubation campus in Hangzhou, the capital of east China’s Zhejiang Province and less than one hour away from Shanghai via high speed train. Just a few kilometres from Alibaba Group headquarters, Dream Town has become one of the places to be for Internet start-ups, with free office space and infrastructure facilities for the first three years.

The construction of Dream Town started in October 2014 and only seven months later, the first start-ups moved in. The total public and private funding of these companies is adding up to over US$4bn. Today, there are 385 start-ups and 4,000 employees working on their “dream” of becoming the next Alibaba.

Dream Town, start-up incubation campus in Hangzhou
Dream Town, start-up incubation campus in Hangzhou

Dream Town’s mid-term objective is to attract 10,000 college graduates to set up start-ups. In China, there are already more than 20 start-up campuses with a plan to increase those to 250.

Agility and the power of many

"Germany is about accuracy. China is about agility." (Jane Lin-Baden, CEO Isobar China Group at the INSIDECHINASUMMIT)

In the last years, China has not only copied proven digital services from the US but made them better: logistic networks, online shops, procurement and invoicing were adapted, implemented and improved. The big players have created a reliable infrastructure and ecosystem set up to cope with a very unpredictable demand. Businesses are build up to respond instead of predict. Hybrid core teams are able to develop products quickly catering to the ever changing consumer demands of millions of Chinese consumers.

However, China’s ecommerce is not just about the big players. Instead, the Internet giants engage small retailers and individuals to sell their own products online. By allowing everyone to do commerce, they considerably drive peer2peer commerce building upon the Chinese entrepreneurial spirit. Thanks to the data logistic platforms, even small businesses and individuals in less populated regions get access to the enormous consumer potential of China.

Since entry barriers are very low, it is easy to open up own stores or even sell to friends via WeChat. Also, in comparison to Europe, there are no established communication and trading patterns. Chinese do not have to think about how to migrate expensive offline stores into the online world.

It is all about understanding Chinese culture

Understanding Chinese business culture is crucial for Western companies that want to expand successfully. This starts with special appreciation for a Chinese business card or a traditional Chinese meal. Doing business in China requires building trusted relationships first.

Furthermore, understanding innovative business models and digital transformation originating in China can provide competitive advantages and potential for future partnerships. What does not work is to copy and paste ideas and business models from other parts of the world. Global brands entering the Chinese market need to adapt to local market conditions and work with regional partners rather than just apply their global business model.

“Disney realized that they are nobody. Instead they respected Chinese culture. That’s how they managed to become the most successful US brand in China. ” (Kerr Xu, CEO Shanghai Hippo Animation)

Doing business in China - risk or opportunity?

„Today is difficult, tomorrow is even more difficult, but the day after tomorrow will be beautiful.“ (Jack Ma, Founder Alibaba Group)

For European manufacturers and brands, China has opened its window of opportunity. Some of the latest trends are Cross Border and O2O (online2offline, a new business model combining online shopping and front line transactions). This development is mainly driven by three factors:

  • Consumers’ quality concerns towards local products
  • Consumers’ trust in European and especially German brands
  • Chinese government helping to develop free trade areas to enable controlled cross border sales from Europe.

Due to the fact that Chinese university education will increase, the middle and upper class will grow (today 300m). ‘Made in Germany’ is considered a luxury for this target group. The next generation of educated Chinese will be willing to spend more money and accept longer delivery times just to receive good quality from overseas.

Therefore, German businesses and brands should rely on their quality and core value. However, they need to further understand and embrace the Chinese consumer and how to do business in a digital world. We could not summarize it better than one of our participants did:

“Before the trip I thought that the world was full of risks, after this trip I think the world is full of opportunities.”

Many thanks to all our partners that made this event possible and especially to our sponsor Demandware. If you would like to know more about our INSIDE CHINA SUMMIT, future events about digital transformation or how to digitally transform your business, please do get in touch.

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